ARTICLES

BUSINESS TAX

Yet again, unless renewed by Congress, the additional 50% bonus depreciation will expire on December 31, 2014, as well as the additional $8,000 first-year depreciation cap for passenger automobiles.

Section 179 will become way less powerful as of January 1, 2015. Its expensing dollar cap is officially scheduled to plunge from the current $500,000 to $25,000, while the investment ceiling will drop from $2 million to $200,000.

Health flexible spending arrangements (health FSAs) are popular savings vehicles for medical expenses, but their use has been held back by a strict use-or-lose rule. A few years ago, the IRS modified the use-or-lose rule to allow cafeteria plans to adopt a grace period. Participants can use amounts remaining in a health FSA at year-end for up to an additional two months and 15 days. This grace period is optional. Employers are not required to offer the grace period, although many do.

Recently IRS added a Carryover At its option, an employer may now amend its cafeteria plan to provide for the carryover to the immediately following year of up to $500 of any amount remaining unused as of the end of the year in a health FSA. The carryover of up to $500 may be used to pay or reimburse qualified expenses under the health FSA incurred during the entire plan year to which it is carried over. Additionally, the carryover does not count against or otherwise affect the salary reduction limit ($2,500 for 2014) for health FSAs. However, the new rules do not allow participants to cash out unused health FSA amounts or convert them to other types of benefits.

IThe maximum carryover amount is $500. An employer can choose to offer a $0 carryover, a $500 carryover or any amount in between. Employers cannot offer both the grace period and the carryover. It is a choice of either the grace period or the carryover....or neither. In regulations, the IRS described how employers can amend their cafeteria plans to provide for the carryover and how they can, if they choose, replace the grace period with the carryover.

IRS has released much-anticipated final “repair” regulations (T.D.9636) governing when taxpayers must capitalize and when they can deduct
their expenses for acquiring, maintaining, repairing and replacing tangible property. The final regulations follow the basic outline of the proposed and temporary regulations and made changes to clarify, simplify, and refine, as well as to create several new safe harbors. The changes singles out by the IRS include:

A revised and simplified de minimis safe harbor rule, which allows a taxpayer with an applicable financial statement to deduct up to $5,000 of the cost of an item of property per invoice (or per item as substantiated by an invoice). For any taxpayers who don't have an applicable financial statement, they may elect to expense up to $500 per invoice/item

The extension of the safe harbor for routine maintenance to building

An annual election for building that cost $1 million or less to deduct up to $10,000 of maintenance costs or, if less, two percent of the building's adjusted basis

A new annual election to capitalize repair costs that are capitalized on a taxpayer's books and records

The refinement of the criteria for defining betterment and restorations to tangible property

PERSONAL TAX

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income, including wages, other compensation, and self-employment income, that exceeds specified thresholds, $200,000 for a single individual; $250,000 for married couples filing a joint return; and $125,000 for married filing separately.

Withholding of the additional 0.9 percent Medicare tax is imposed on an employer if an employee receives wages that exceed $200,000 for the year, whether or not the employee is married. The employer is not responsible for determining the employee’s marital status. The penalty for underpayment of estimated tax applies to the 0.9 percent tax. Thus, employees should realize that the employee may be responsible for estimated tax, even though the employer does not have to withhold.

The paying limitation for defined contribution plans will increase to $53,000. That’s a $1,000 hike for Keogh plans, profit sharing plans and similar arrangements. Retirement plan contributions can be based on up to $265,000 of salary.

The 2015 401(k) limit will increase to $18,000 up from $17,5000 in 2014, with additional $6,000 catch-up contribution for those born before 1966.
These contribution limits apply to 403(b) and 457 plans, too.

The 2015 ceiling on SIMPLEs will also increase $500 to $12,500, with additional $3,000 catch-up contribution for age 50 or older.

On January 1, 2013, the American Taxpayer Relief Act of 2012 was passed which permanently establishes an exemption of $5 million (as 2011 basis with inflation adjustment) per person for U.S. citizens and residents, with a maximum tax rate of 40% for the year 2013 and beyond. For 2015, the exemption number has slowly climbed up to $5.43 million from $5.34 million in 2014.

The annual exclusion for gift taxes will remain the same, $14,000 per person. Married couples may “split” their gifts to each recipient, which effectively raises the tax-free gift to $28,000

IRA owners and beneficiaries who have reached age 70 ½ are permitted to make donations to IRS-approved public charities directly out of their IRAs. These so-called qualified charitable distributions, or QCDs, are federal-income-tax-free to you, but you get no charitable deduction on your tax return. To qualify, the funds must be transferred directly from your IRA trustee to the charity. You cannot receive the funds yourself and then make the contribution to the charity. However, the IRA trustee can give you a check made out to the charity that you then deliver to the charity. You cannot arrange for more than $100,000 QCDs in any one year. If your spouse has IRAs, he or she has a separate $100,000 limitation. Unfortunately, this taxpayer-friendly provision is set to expire at year-end unless extended by Congress.

Beginning Jan. 1, 2013, you can claim deductions for medical expenses not covered by your health insurance that exceed 10 percent of your adjusted gross income, instead of the old 7.5%-of-AGI hurdle.

If you or your spouses are 65 years or older or turned 65 during the tax year you are still allowed to deduct unreimbursed medical care expenses that exceed 7.5% of your adjusted gross income through 2016.

Medical expenses paid for a taxpayer’s dependent, such as a parent or grandparent, can be added to the taxpayer’s own expenses for itemized medical expenses deduction purposes. For a person to be the taxpayer’s dependent, the taxpayer much pay more than half of that person’s support for the year.